Audit Management Letters

My client has received a management letter from the auditor of their SMSF. Should they be worried?

All SMSF trustees are required to appoint an approved auditor to audit the operations of their fund each year. This annual audit must include both a financial audit (Part A) and compliance audit (Part B). If matters of concern arise during the course of the audit, the auditor must communicate the details of these concerns with the trustees. This is most often done in writing, through a letter that is commonly referred to as a “management letter” or an “audit completion letter”.

You may be thinking “isn’t that what the audit report is for?”

Certainly, any material findings or concerns must be reported in the auditor’s independent auditor’s report. This includes:

• concerns about whether the financial report presents a “true and fair” record of the financial position of the fund and its operations (in Part A of the auditor’s report), and
• conclusions that the fund has breached one or more specific provisions of the Superannuation Industry (Supervision) Act and Regulations (in Part B of the auditor’s report).

Whilst auditors are only required to report material breaches of the Superannuation Industry (Supervision) Act and Regulations in their auditor’s report, they are required to tell trustees about any matters of concern, which would usually include all identified breaches regardless of their materiality. They’ll do this in their management letter. For example, the auditor may have concluded that the fund’s bank account going into overdraft during the year wasn’t of sufficient size or duration to be reported in the auditor’s report but the breach still needs to be reported to the trustee in the management letter.

Auditors may also choose to use their management letter to expand on issues raised in Part A of their report and point out the inherent risks of certain investments. For example, where the auditor was unable to obtain sufficient audit evidence to confirm the value and recoverability of immaterial loans to unrelated parties.

From the auditor’s perspective, if used well, a management letter may serve as a tool to reduce the risk of litigation against the auditor.

So, what does my client need to do?

It is important that your client reads the management letter and:

• ensures they understand any risks raised by the auditor and form their own opinion of the continued appropriateness of the fund’s investments, and
• take steps to ensure any compliance breaches do not happen again. Depending on the circumstances, where a breach is repeated or continues into the following year, the auditor may be required to report the issue to the ATO which could result in the ATO taking remedial action such as penalising the trustees.